Homebuilders Lasso Texas Orders

Recent reports suggest that the Lone Star State is the country's hottest housing market.
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Higher energy prices were supposed to put a crimp on homebuyers and thus hurt homebuilders. But so far, oil fever has been a boon for builders, so long as they're selling homes in Texas.

Builders' recent order reports suggest that the Lone Star State is currently the brightest spot in the country's housing market. Whereas many of the bread-and-butter, easy-money areas of California, Florida, Washington D.C., and Arizona are slowing, housing sales are spiking in the four major Texas cities of Dallas, Houston, San Antonio, and Austin. The recent new order numbers at

Centex

(CTX)

,

Meritage

(MTH) - Get Report

and

Ryland

(RYL)

would've looked a lot worse if it weren't for strength in these cities.

The Texas housing boom caught fire in 2005 and builders have been quick to open new communities to catch the wave. "I think you could probably see it coming once oil prices moved up, and I think it will last for quite a while," says Stephen East, an analyst with Susquehanna Financial Group.

In its most recent quarter, Meritage posted just 1% unit order growth. Orders were flat in Arizona, dropped 52% in California and fell 13% in Nevada. But orders jumped 22% in Texas.

At Ryland, overall orders fell 5%, with drops in the West and North and flat sales in the Southeast. In Texas, though, orders rose 27%.

Centex is also having problems producing order growth in the mid-Atlantic, Southeast, Midwest and a couple areas of California -- but orders were up 28% in the Southwest, largely due to Texas sales.

"When it comes to orders this quarter (for Centex), the Texas region delivered as well as the university did in the Rose Bowl. Without a resurgent Texas market, the orders would have beenhorrendous, yet that is exactly why one owns a name such as CTX -- diversity," East wrote in a recent research report.

The Texas housing market is expected by many to remain strong, given the rising energy prices which are fueling economic growth in the state. Housing speculators, after being run out of Florida, California and Arizona, are already turning up in areas like Austin to flip properties for a quick buck. But speculators might be in for a big surprise, since Texas is far from land-constrained and artificial demand is not likely to have as big of an effect on housing prices in the state.

Homebuilder investors should remember that Texas is not a savior for the sector. The state's housing prices are far lower than California, Florida and Arizona. For example, at Ryland, the average selling price for home closings in Texas was $184,000, compared with $378,000 in California and other Western regions.

Since profit margins are lower in Texas, builders need to generate more volume to get the same amount of income out of the region, East says.

Texas will never be as sexy or lucrative as the coastal regions have been for builders. But betting on oil-fueled housing growth in the state gives builders one more market with which to spread bets and recover fixed costs.

When

Pulte Homes

(PHM) - Get Report

reports earnings after the market close Wednesday, look for Texas to also be a focus of conversation. During the builder's last earnings call, management said sales in Texas were very strong, particularly in Austin and San Antonio. The company also said it was in the midst of opening some of its best communities in the state.